U.S. SEC official urges companies issuing tokens to protect investors

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.Jonathan Ernst

NEW YORK (Reuters) - Companies creating and issuing tokens to raise capital for their projects have a responsibility to protect their investors, said a U.S. Securities and Exchange Commission official on Tuesday, the first public comments on the issue made by an agency employee.

So-called "initial coin offerings" (ICOs) are the current rage among startups in the blockchain space, enabling new companies with a technology idea to skip banks and venture capital firms when raising capital.

The blockchain is a public online ledger of transactions that first became well known as the software underpinning bitcoin, the first digital currency.

"Whether or not you are regulated by the SEC, you still have fiduciary duties to your investors," said Valerie Szczepanik, the head of the SEC's distributed ledger group. "If you want this industry to flourish, protection of investors should be at the forefront."

The SEC official, who is also an assistant director of the commission's division of enforcement, spoke at a panel discussion at the Consensus blockchain conference in New York.

Szczepanik, however, stressed that her views were her own and did not reflect that of the SEC.

She urged the token issuers to have built-in protection mechanisms for investors and full and fair disclosure.

"At the SEC, we like to facilitate capital-raising, but at the same time, we want to ensure a fair market," said Szczepanik.

These ICOs have raised red flags due to a lack of regulatory oversight. Some market participants say ICOs could be illegal because the companies are selling tokens that can be considered securities, which fall under the SEC's jurisdiction.

"Whether a token is a security or not is a fact or circumstance-based thing and you have to really pick it apart," Szczepanik said.

In a separate panel discussion on Monday, Peter Van Valkenburgh, director of research at cryptocurrency advocacy group Coin Center, issuers should stop referring to the sale of their assets as initial coin offerings.

"It's like painting a target on yourself. Because, what does an organization like the SEC regulate? They regulate IPOs," said Van Valkenburgh, referring to initial public offerings. "Why would you adopt the terminology of the regulator when you’re building a thing you hope they don't regulate?"